Equation V2, What Has Evolved After the Launch of Equation V1?

Equation is a decentralized perpetual contract built on Arbitrum. It implies a BRMM model and allows up to 200x leverage to traders and Liquidity Providers

Equation is the new term in decentralized finance (DeFi), leading to significant development in perpetual trading. DeFi has experienced remarkable growth since the emergence of automated market makers (AMMs) like Uniswap in the spot market. 

The trading volume for the spot market is much less than that of centralized exchanges for perpetual contracts. There is no equivalent growth for AMMs tailored for perpetual.

To overcome this difference, Equation introduced the innovative Balance Rate Market Maker (BRMM) model, building a new structure of perpetual trading to reduce the gap between spot and perpetual markets.

It is a revolutionary model that offers liquidity providers and traders a significant leverage limit of 200x. It redefines the possibilities for traders while improving capital efficiency for liquidity providers. Equation shapes the future of DeFi with its trailblazing approach to perpetual trading through fairness, security, and community-driven innovation.

Equation V2, launched in December 2023, refines this algorithm, further improving market-making efficiency and the risk-hedging capabilities for liquidity providers (LPs) while eliminating the Risk Buffer Fund. 

Improvements in Equation V2

Precise Passive Position for Liquidity Providers

LPs added liquidity corresponds one-to-one with passively held positions. It allows every liquidity provider to know the size of their holdings and the risks in real time. This development will enable LPs to hedge risks more accurately and support their expansion into various market-making strategies. As a result of this upgrade, Equation can theoretically support any asset with an Oracle price.  

Multiple fees and leverage tiers

The beginning setup introduced three default fee levels, which include 0.02% for 100x leverage, 0.04% for 50x leverage, and 0.01% for 20x leverage. This default fee structure ensures liquidity providers (LPs) are adequately compensated for assuming different levels of risk. Moreover, it sets the groundwork for future market creation for any token.

The risk Buffer Fund (RBF) is eliminated.

RBF was introduced in Equation v1 to protect LPs from substantial losses. However, it had significant drawbacks, such as contributing to the RBF’s liquidity; it could not hedge risks, and LPs were highly protected. LPs mainly were from the highest leverage state. It led to an imbalance in the overall system of risk control. 

Now, Equation V2 significantly improves the risk control ability of LPs. The additional protection. The risk buffer fund offered was no longer needed.

They have also made some adjustments and optimized other aspects of the algorithm to complement the achievement of the upgrade goals.

Importance of Liquidity Providers

• In the BRMM model, liquidity providers act as temporary parties to traders:
• When users liquidate, open, or close positions, LPs open or close positions of the same size as those in the opposite direction.
• The proportions of LPs held in passive positions are relative to the total positions of all LPs, and the proportion of liquidity they provide about the local liquidity of all LPs is always maintained in equivalence.

Sources of income for LPs include:

• A part of the users’ trading fees.
• LPs consistently earn funding fees from the passive positions they hold.
• Liquidity mining.

If the LPs’ held passive positions have a positive PnL, the LPs earn additional profits in addition to the above-mentioned fixed income sources.

Risks for Liquidity providers

They face risk in their net position when they hold passive positions.

LPs can provide liquidity with leverage, as they face the risk of liquidation if they experience substantial losses on passive positions that result in insufficient margin.

The developers recommend LPs set reasonable leverage levels and use hedging strategies to manage net open position risk.

Fee and Leverage Schedule

Max Leverage	Trading Fees/ With Referral	Maintenance Margin
200x	0.01%/0.005%	0.2%
100x	0.02%/0.01%	0.4%
50x	0.04%/0.02%	0.4%
20x	0.1%/0.05%	0.6%
10x	0.2%/0.1%	1%

Distribution of Trading Fees

When referral code is not bound

50% is distributed to Liquidity providers

25% is allocated for EQU token staking

25% is allocated for EFC architects

When referral code is bounded

39% is allotted to liquidity providers

25% is allocated for EQU token staking

25% is distributed to EFC architects

11% is allotted to referrers, of which 10% is given to EFC members and 1% is allotted to EFC connectors.

Components of Equation Ecosystem

Equation Token

Equation, abbreviated as EQU, is the native token with a maximum supply of 10 million tokens. The whole quantity of this token is to be developed through position mining, liquidity mining, and referral mining, and it is rewarded to community users. 

The initial daily formation of EQU was fixed at 10,000 tokens, which were allowed to be adjusted via DAO but could not exceed 10,000. EQU holders earn 25% of the protocol’s trading fees by staking.

Equation Founders Club (EFC) is the native NFT of Equation. It is divided into three categories: members, connectors, and architects. These categories are distributed among influencers, the core promotion team, and the core R&D team.

Conclusion: Recent Developments

The testnet was launched in September 2023. The audit of the smart contract was completed by October 2023. The official launch was scheduled after that. 

The next step of the Equation ecosystem involves a combination of technical development, community-building efforts, and a commitment to its core principles of security, innovation, and user empowerment as it works toward its vision of a decentralized financial future.

FAQs

Where can a user buy EQU?

EQU is not listed on mainstream exchanges as of now.

Where can a user store EQU?

It can be stored in a hardware cold wallet for longer durations.